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Value-based care has emerged as an alternative to the traditional fee-for-service model; it is focused on quality rather than quantity. Depending on the healthcare organization, many teams are adopting population health and value-based care in addition to fee-for-service, making it increasingly common for both reimbursement models to coexist within an organization.
In the traditional fee-for-service payment model that healthcare organizations have been using for decades, providers are paid for the volume and types of services performed. For example, each MRI performed, or unit of anesthesia delivered would be billed at a predetermined rate. As a result, providers had incentive to order more tests, perform more procedures, and take on more patients to receive more payment.
Value-based care ties payments to the quality of care provided, ultimately rewarding providers for administering effective care regimens and increasing efficiency. In more basic terms, value-based care models center on patient outcomes and how well healthcare providers can improve quality of care based on specific measures (e.g. reducing hospital readmissions and improving preventative care).
Although organizations are embracing the movement toward value-based care at various speeds, most are looking to implement value-based care models to combat rising healthcare costs and create a focus on preventative care. There are primarily three groups pushing for this shift for varying reasons:
Value-based care (also referred to as accountable care or population health management) is growing in popularity in part because the value-based reimbursement model provides incentives for providers to offer the best care at the lowest cost. As the name suggests, patients are receiving more value for their money.
Healthcare payers are also seeing significant cost savings after implementing value-based reimbursement programs. Humana reduced healthcare costs through Medicare Advantage Programs by $3.5 billion and Humana isn't alone. Blue Cross and Blue Shield of North Carolina touts $153 million in savings in 2019, their first year of rolling out a value-based care plan. These examples show that, despite operating on different value-based reimbursement contract models, they could still see positive results following a transition to value-based care.
Because value-based reimbursement is based on the quality and cost of care, there are several models medical groups and insurance companies can use to align on payment. Three of the most common agreements include:
Under bundled payments, a single, fixed payment covers all services associated with an episode of care. An episode of care could be a hip replacement or cardiac surgery, for example, and could include any inpatient, outpatient, and rehabilitation care costs. Insurance companies determine the fixed payment based on the historical performance of the hospital and providers.
In this model, healthcare providers receive rewards if they successfully generate additional savings and new efficiencies in care—such as better care coordination and less wasteful test ordering. If spending exceeds the predetermined bundle price, the healthcare providers will typically bear the financial risk.
The goal of a bundled payment is to get providers to work collaboratively to provide a higher quality of care while controlling costs.
Capitation model arrangements pay a provider an advanced fixed fee—referred to as Per Member Per Month (PMPM).
The PMPM is often determined by the ranges of services provided, the number of patients involved, the relative wellness or sickness of the patient population, and the period of time during which the services are provided.
For example, Medicare Advantage uses a patient’s historical diagnosis history, which maps to Hierarchical Condition Category (HCC) codes, to create a Risk Adjustment Factor (RAF) score. This score is then multiplied by the base PMPM capitated rate to determine the PMPM for the next period of coverage.
Because the capitation fee needs to cover the cost of care for people at many health levels, capitation creates an incentive for providers to control utilization and healthcare costs by avoiding unnecessary services.
Under risk-sharing arrangements, both the insurer and the providers can share revenue if they deliver care at a cost less than the amount budgeted.
Some Accountable Care Organizations (ACOs), such as the Medicare Shared Savings Program (MSSP), are structured this way, enabling the ACO to share savings with Medicare.
Risk-sharing arrangements can be set up so that providers or provider groups share in the potential profits or in the downside financial risk, if the cost of care exceeds the amount budgeted.
Besides affecting the financial relationship between physician organizations and health insurers, risk adjustment also levels the playing field among health plans by allocating funds from plans with relatively low-risk (i.e., young, healthy) patients to plans with relatively high-risk (i.e., old, sick) patients.
CMS and commercial insurance companies use RAF scores to ensure healthcare organizations that cover sicker-than-average patients receive additional compensation to pay for the extra care and services they provide.
As mentioned above, a risk adjustment score, or RAF score, acts as a predictive reimbursement model to estimate a healthcare organization's cost to care for a patient.
The primary driver of a RAF score is the patient's HCC codes, which represent specific medical conditions. The HCCs, together with the patient's demographic and program enrollment information (i.e., ACA plan, CMS dual eligible, ESRD, etc.) determine the patient's full RAF score; or their estimated cost to a healthcare organization.
See examples of RAF scores for two patients below. Joe Doe’s RAF score would result in a higher expected cost of care than Mary Jones's.
|Joe Doe, Age 85, Male
|Mary Jones, Age 65, Female
|Specified Heart Arrhythmias
|Cirrhosis of Liver
|Diabetes with Chronic Complications
Medical groups that treat “sicker” patients, such as Joe Doe, incur additional time and effort in the care delivery process. This translates into an increased pool of funds (represented in PMPM payments in many cases), so they can effectively treat their sick patients.
For medical groups to ensure their “pool of funds” accurately reflects the wellness of their patient population, the accuracy and completeness of diagnosis/HCC risk adjustment coding is a must.
The benefits of risk adjustment are important both to insurance companies and providers.
Without risk adjustment, there would be an incentive for health insurers to only enroll lower-risk patients as a cost-saving measure. Risk adjustment mitigates that potential for discrimination and stabilizes payments to reflect differences in benefits and plan efficiency rather than the overall health of the population.
The intent of risk adjustment is to offset the cost of providing health insurance for individuals—such as those with chronic health conditions—who represent a high risk to insurers. Under risk adjustment, an insurer who enrolls a greater-than-average number of high-risk individuals receives compensation to make up for extra costs associated with those enrollees.
Since risk adjustment closely ties to reimbursement, providers also benefit from it. Risk adjustment enables more accurate reimbursement by accounting for differences in patient demographics and other risk factors that affect outcomes outside of the provider's control. Without risk adjustment, providers treating higher-risk patients would not receive payments that accurately reflect the relative health of the patients they treat and the quality of care they provide.
Risk adjustment relies on the diagnoses documented by the physician at the time of a patient’s visit. Physicians can (and should) focus on what they do best: providing excellent patient care. That being said, since risk adjustment models tie payments to outcomes, medical groups (and physicians indirectly) receive more appropriate reimbursement only when they correctly document and capture diagnosis codes.
For example, it’s not uncommon for patients to have complications related to a diabetic diagnosis. A physician who documents these complications as being affected by the diabetes will receive appropriate reimbursement for taking care of a sicker patient.
If the physician doesn’t report patient health information fully and accurately, omitting the link between complications and diabetes, RAF scores are set too low and the payer does not have an accurate picture of a patient's health, which results in lower reimbursement.
Documentation and coding for risk adjustment is complex, and to ensure data accuracy, healthcare organizations should implement regular in-house audits and monitoring of their value-based reimbursement programs. Regularly auditing and monitoring your organization’s coding ensures overall compliance and identifies opportunities to avoid inappropriately capturing an HCC code that could lead to an inflated RAF score. Either establishing a formal process to review value-based encounters or selecting a targeted sample can do this.
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